SandRidge Energy Inc. is pushing ahead on plans to become a niche natural gas player after throwing down a bid close to midnight last Tuesday to buy bankrupt Crusader Energy Group Inc. in a cash and stock transaction worth an estimated $230 million.
Under the agreement, Crusader's reorganization plan would cancel all of its equity interests and its subsidiaries would be owned indirectly by SandRidge. The bankruptcy court still has to give its approval, but the transaction could close before the end of the year, SandRidge CEO Tom L. Ward told energy analysts and investors during a conference call Wednesday.
Ward said he's never seen a better time for acquisitions and developments (A&D).
"It is a very unique time in the business, and in fact...I've been in business since 1983 and have done a lot of acquisitions, [but] I have not seen a time like this since really the early 1990s that there are packages available," Ward said. "We at SandRidge have had a very active A&D team. However, we've not made any acquisitions since 2006. And the reason why is competition and the pricing the people were willing to pay for acquisitions.
"Today is a very unique time, and we believe for the first time since the early '90s you can buy reserves and not have to pay anything for the proven undeveloped portion of a reserve deck. Since 1998, anyway, I've always given some amount of credit to proven undeveloped reserves, let alone later on to even paying for 3P [proved plus probable]."
Crusader, which is 76% weighted to gas, explores in the Cleveland Sand horizontal play in Oklahoma, the West Texas Barnett/Woodford play, noncore Barnett Shale and some acreage in the Bakken Shale. Of primary importance at this point is the West Texas holdings. SandRidge is the dominant player in the West Texas Overthrust, where the Pinon Field is its most significant producing asset.
SandRidge has more than 260,000 acres in the Pinon Field, and in 2008 it accounted for 319 MMcfe, which was more than half of the company's total annual output. Earlier this year SandRidge redeployed some cash to boost its exploration efforts there (see NGI, July 6).
The transaction would increase SandRidge's positions in the Anadarko Basin of western Oklahoma and in the Permian Basin in West Texas, and cash flow from Crusader's existing production also would enhance SandRidge's balance sheet and provide increased liquidity, Ward said.
Asked why SandRidge wanted to buy gas assets when prices were so low, Ward said the gas-weighted properties "tend to be less expensive, and we still have a bright future for gas prices. We always look toward natural gas..." Ward said "it's fair to say we've been looking for gas assets since 2006 and today we'll look for gas in basically any area, compare that to our inventory of drilling sites inside the company, and if we believe we can make an accretive acquisition, we will make it."
Under the terms of the transaction, up to $85 million in cash would be paid to Crusader. SandRidge common shares to be issued would be valued at $13.45/share; when the stock market opened Wednesday SandRidge was trading at around $13.05/share. SandRidge also would issue warrants to purchase an additional two million shares of common stock exercisable at a price of $15/share for five years after the transaction closes. If the bankruptcy court were to approve an alternative transaction, Crusader would pay SandRidge a termination fee.
Energy analysts with Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said they're "believers" in SandRidge, "and the stock is one of our top picks for its growth and exploration potential in the core West Texas Overthrust play...We understand the strategic opportunity to buy 'cheap,' high-quality assets with little competition. We also understand that the opportunity for great acquisitions does not align with our perfect world for [SandRidge] stock."
The TPH team said "it would be serendipity" to buy Crusader's reserves "on the cheap" using free cash flow from the Pinon Field in 2011, "but acquisitions likely won't be available then and are available now." SandRidge "sees an opportunity to buy proved developed assets for lower F&D [finding and development] costs than many of the shale plays that are being drilled today..."
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